Last January, I posed the question that buying shares in the S and P 500 may be just as effective as following professionals' stock market picks. Some women who are participating in the Self-Invested Women Pilot Program are considering whether they are passive (people who buy an index, like the S and P 500) or active (people who buy individual stocks or types of stocks, like energy and health care) investors. This may help you make that decision.
The S and P 500 Index
This index allows investors to buy 75% of the publicly traded companies in the US, many of which derive a significant part of their income outside the country. While there are many indexes (Dow Jones Industrial, the Russell 2000, the Wilshire 5000), the S and P 500 is the index against which the vast majority of money managers measure their performance.
The Challenge
Last September, ten investment strategists gave their recommendations for which sectors of the market would outperform the total market in 2010 in Barron's magazine. We chose six of these strategists, representing US Trust, Citigroup, JP Morgan, BlackRock, Deutsche Bank and Goldman Sachs. We'll compare the S and P 500 index performance against the sectors recommended by each investment professional, assuming you were to invest equally in all sectors.
Fees
It requires no management fee to invest in an index like the S and P 500. Investment advisers' fees range from 2% to 5%. We'll use the lower figure, 2%, for this comparison, and deduct 1/2% every quarter from the recommendations by the advisers.
Since there are trading costs for both individuals and money managers, we'll consider this a "wash."
Long Term Investing
We'll assume that we're in the stock market for long term investing, not short term "trading." Therefore, one quarter's data is insufficient to make this decision. We'll look at this performance all year, and discuss how relevant this little experiment is to your long term strategy.
First Quarter Performance
S and P 500
S and P 500 was up 6.04% in the first quarter this year.
US Trust
Technology + 10.45%
Materials + 6.89%
Energy + 5.04%
Industrials + 4.77%
Weighted Average performance +6.7875%, less 1/2% fee = +6.2875%
US Trust's recommendations beat the S and P 500 by about a quarter of one percent in the first quarter.
Citigroup
Materials + 6.89%
Financials - 3.68%
Software + 10.45%
Energy + 5.04%
Weighted Average performance + 4.675%, less 1/2% fee = +4.175%
Citigroup's recommendations lagged the S and P 500 by about 1.87% the first quarter.
JP Morgan
Energy + 5.04%
Industrials + 4.77%
Financials - 3.68%
Technology + 10.45%
Materials + 6.89%
Weighted Average performance + 6.166%, less 1/2% fee = +5.666%.
JP Morgan's recommendations lagged the S and P 500 by about 3/8 of one percent in the first quarter.
BlackRock
Energy + 5.04%
Health Care + 8.53%
Weighted Average performance + 6.785%, less 1/2% fee = + 6.285%.
BlackRock beat the S and P 500 by just under 1/4 of one percent in the first quarter.
Deutsche Bank
Technology + 10.45%
Health Care + 8.53%
Energy + 5.04%
Industrials + 4.77%
Weighted Average performance + 7.1975%, less 1/2% fee = +6.6975%.
Deutsche Bank beat the S and P 500 by 3/4 of one percent in the first quarter.
Goldman Sachs
Energy + 5.04%
Materials + 6.89%
Financials - 3.68%
Technology + 10.45%
Weighted Average performance + 4.675%, less 1/2% fee = 4.175%.
Goldman Sachs lagged the S and P 500 by 1.865% in the first quarter.
Summary
So far this year, three underperformed the S and P 500 and three lagged behind its performance, with Deutsche Bank doing best, and Goldman worst.
Last year, only Deutsche Bank and JP Morgan beat the averages, and four lagged behind.
Another update after the second quarter.
We'd love to hear your thoughts. Are you an active or passive investor - and why?
Showing posts with label capital markets. Show all posts
Showing posts with label capital markets. Show all posts
Wednesday, April 7, 2010
Wednesday, August 19, 2009
Late Summer Economy
Summer is generally a time when capital markets languish, brokers vacation in the Hamptons, and there is little economic news. That is not the case in the Summer of 2009.
A fierce battle is being fought between the economic interests of those who have monetized health care - the pharmaceutical companies, the health insurers and health care providers like doctors and nurses - and millions of Americans who are teetering on the edge of economic insolvency because of our country's unsustainable rise in the cost of health care. The stakes are undeniably high, as are the emotions of those who argue both sides of the issue.
On one thing we can all agree. To fail to address this issue is to destroy the long term health of our economy.
In addition to that issue, however, we are also emerging from the worst recession since the Great Depression. Because financial markets ceased to function at the end of last year, an enormous amount of money was provided to commercial banks (and investment banks who changed their charters to avail themselves of this money) in order to prevent a financial disaster. This disaster was caused by securitizing and selling the risk of poorly underwritten mortgages, and the sales - and disastrous effects - were worldwide.
This problem began in the late 1990s, with the dissolution of the Glass-Steagall Act, that separated commercial and investment banking. It appears that we expect, however, that this decade long problem-in-the-making is solved immediately.
"What is taking so long?" is the predominant economic question.
We have, apparently, become a nation convinced that there are simple, quick solutions to everything.
We continue to face declines in manufacturing, rising unemployment, plummeting housing prices and a distinct lack of consumer confidence. On the bright side, inflation is almost non-existent, interest rates are at decade lows, and capital markets show unmistakable signs of predicting an end to our recession. We are working on financial reform and the excesses of the past seem, at least for the present, to have subsided.
It's a mixed bag. We will not suddenly pop out of this quagmire in a month or two. That is clear.
It is also clear that we will politicize economic issues. We will criticize the Economic Team, point to rising deficits, scream about banker's bonuses and wonder why we're not back to normal seven months from the inauguration of the new administration.
Yet, not one of these issues is directly relevant.
Rising deficits? Yes. Was there an alternative to a huge cash infusion into the economy? No.
Banker's bonuses? Yes. Are they a significant percentage of the "bailout money?" No.
What, then, should we be discussing?
A fierce battle is being fought between the economic interests of those who have monetized health care - the pharmaceutical companies, the health insurers and health care providers like doctors and nurses - and millions of Americans who are teetering on the edge of economic insolvency because of our country's unsustainable rise in the cost of health care. The stakes are undeniably high, as are the emotions of those who argue both sides of the issue.
On one thing we can all agree. To fail to address this issue is to destroy the long term health of our economy.
In addition to that issue, however, we are also emerging from the worst recession since the Great Depression. Because financial markets ceased to function at the end of last year, an enormous amount of money was provided to commercial banks (and investment banks who changed their charters to avail themselves of this money) in order to prevent a financial disaster. This disaster was caused by securitizing and selling the risk of poorly underwritten mortgages, and the sales - and disastrous effects - were worldwide.
This problem began in the late 1990s, with the dissolution of the Glass-Steagall Act, that separated commercial and investment banking. It appears that we expect, however, that this decade long problem-in-the-making is solved immediately.
"What is taking so long?" is the predominant economic question.
We have, apparently, become a nation convinced that there are simple, quick solutions to everything.
We continue to face declines in manufacturing, rising unemployment, plummeting housing prices and a distinct lack of consumer confidence. On the bright side, inflation is almost non-existent, interest rates are at decade lows, and capital markets show unmistakable signs of predicting an end to our recession. We are working on financial reform and the excesses of the past seem, at least for the present, to have subsided.
It's a mixed bag. We will not suddenly pop out of this quagmire in a month or two. That is clear.
It is also clear that we will politicize economic issues. We will criticize the Economic Team, point to rising deficits, scream about banker's bonuses and wonder why we're not back to normal seven months from the inauguration of the new administration.
Yet, not one of these issues is directly relevant.
Rising deficits? Yes. Was there an alternative to a huge cash infusion into the economy? No.
Banker's bonuses? Yes. Are they a significant percentage of the "bailout money?" No.
What, then, should we be discussing?
- Financial Regulation - Plug up the holes that caused excesses without unduly burdening the financial system
- Long Term Employment Growth Policy - Some jobs, including much manufacturing, are gone forever. Reeducating the work force for long term employment is vital
- Deficit Reduction and National Debt Repayment - Once we've stabilized the economy and gotten back to work (in about a year), we need to raise taxes. Yes, we all need to pay more taxes to reduce the current deficit and repay the national debt. It is as big a security issue as reliance on foreign oil.
There you have it. It's not a pretty story, but at least we're talking about the real issues.
As always, your comments are most welcome.
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